Entries to Natural Order are dedicated to promoting an open & free society.

Monthly Archives: May 2013

When Richard Nixon initiated the “war on drug” in 1971, nonviolent drug offenders counted for less than 10% of inmates of state & federal prisons. But they now constitute more than 25% of a much-larger prison population.

Despite the US government spending billions on expensive, flashy “toys” used by cops & the DEA, drug cartels are enriched to the point that they either enfeeble foreign governments or keep the streets awash in blood.

Who is winning this war other than sanctimonious talking-heads that believe it is a moral struggle or rent-seeking jailers & enforcers whose status & income depends on a policy that is so destructive … ?

As details of the tragedy unfolded live on TV, fingers began to be pointed at the factory owners, the builders & US multinationals, as well as American consumers that prefer low-priced clothing.

The presumption of those that rushed to judgment seems to be that there is something peculiar about the nature of profit seeking or bargain hunting when it comes to Bangladesh.

It seems to have occurred to few of them that much of the blame can be traced to the government & civil authorities of Bangladesh. As it is, the building containing the factory was constructed illegally since it takes many months to obstain a construction permit in Bangladesh.

A quick survey of where such disasters occur will reveal a common thread of “government failure” in that there is an insufficient institutional infrastructure to minimize the risk of such catastrophes. Besides the most fundamental problem is the lack of the “Rule of Law”.

As such, the mechanisms to hold malefactors accountable are weak or are blocked by political privileges.

There are several ways for labor conditions to improve in Bangladesh or any other less-developed economy. One is for there to be more open global trade so that there is broader access to foreign markets for all their goods. Similarly, more open capital flows that allow foreign ownership of productive means (e.g., factories) will improve working conditions. And lastly, more open immigration will lead to an increased scarcity of labor that will cause wages to rise.

Lost amidst the flap over the fact that Apple Inc. did not pay much in taxes, anywhere, is the nature of the claims of governments on the rightfully-earned incomes of their citizens.

The notion of a “tax gap”, the difference between what tax collectors think they should receive & what taxpayers willfully submit, implies a democratic disconnect.

It turns out that the sums can be substantial. For example, the IRS estimates this gap in tax revenues for the US federal government is about $290 billion each year.

Many public officials suggest that shortfalls in tax revenues reflect a tendency toward criminality or unprincipled greed of citizens that ignore their legally-imposed obligations. While pubic officials have in mind what they deserve to receive, citizens assess whether their tax bill is reasonable in relation to the quality of the services they receive.

Most politicians insist that closing the tax gap is a good way to fund new spending. Indeed, increasing compliance is often prescribed by the IMF to governments that turn to it for assistance in sorting out fiscal imbalances.

Several issues are being overlooked in those that would seek to close this gap.

First, there is the problem of corruption, inefficiency & waste associated with government spending. As such, many taxpayers balk at paying more to the tax authorities. No one should anyone feel compelled to pay more until government officials curb waste & fraud. (The losses to fraud involving MediCare & MediCaid are about the same as the reduced spending due to the so-called “sequester”!)

Second, the increased vigilance by tax authorities to close the tax gap would inevitably lead to a reduction in freedom of action.

Third, the focus tends to be on the presumed social benefits of more funds being handed over to government. As such, the increased costs incurred by taxpayers in complying more fully with the tax code tend to be overlooked. If the gains in tax revenues from increased compliance are less than the higher costs incurred by citizens, there would a net social loss.

Taxes are not about funding “essential” government goods or services that might not be provided through private actions in markets. Tax policies are part of a redistributive game that allows political support to be purchased or rewarded.

Despite himself being a lapsed astronomer (No, NOT astrologer!), he derides those “deniers” that lack credentials as climate scientists. In the business of promoting AGW, deniers are ideologues that should not be confused with legitimate scientific skeptics.

But the lack of such credentials did not undermine an earlier assertion of another non-climate scientist pointing to a consensus based on work published in peer-reviewed academic journals. (See, Naomi Oreskes, also NOT a climate scientist!)

The poll in question has the interesting title, The Consensus Project, and the reported results were, amazingly, that a consensus did indeed exist. Imagine that!?!

Indeed, the consensus that global warming is here to stay & is our fault that is so strong that the promoters of the idea felt it necessary to set up the (drum roll, please): The Climate Science Rapid Response Team (CSRRT) to “connect climate scientists with lawmakers & the media”.

Despite having a slam-dunk case for their views, the AGW-people felt a need to hand-feed politicians, bureaucrats & media personalities with the “correct” view on AGW.) A search of the CSRRT web site did not reveal a source of funding to keep up their endeavors.)

While growing up in the USA during the 1950s, I often heard a refrain that had been part of American folklore for at least a century.

And that was: “The dollar, as good as gold!”

It should easy to see why this is no longer the case.

First, a bit of history. Consider that gold content of the US$ was set at $20.67 per ounce in 1832 & was not altered until 1933. As such, there was basically no domestic inflation in the USA for about 100 years & the gold value of the $ in international commerce changed very little except during wartime.

For his part, FDR anticipated Rahm Emmanuel’s mantra to “never let a good crisis go to waste” & issued an executive order forcing all Americans to give up their gold. The fact that this was an egregious violation of one of the most sacred beliefs of the American Republic: the primacy of private ownership.

Overlooking the dangerous precedent of his outrageous action, scholars of that period have perpetuated a conventional wisdom that most of FDRs policies were both necessary & efficacious.

For the next 40 years, foreign governments could redeem $’s for gold. But in August 1971, President Nixon defaulted on America’s promise to exchange gold for $.

Fast forward to the present where near-zero interest rates, massive monetary pumping & the explosion of public-sector debts have all contributed to undermining the myth of the “Almighty Dollar”.

In the not-so-distant future, the price of gold will breach $2000 per ounce.

This will be a testimony to political dishonesty, populist irresponsibility & intellectual failures of most economists to understand the nature of a world with a perfectly elastic supply of paper (fiat) money.

The cover of the latest edition of the Economist heralds a resurgence of the US investment banks. (Oh, aren’t those the TBTF institutions that are more frighteningly LARGE after bailouts, shady loans & shotgun weddings overseen by the Treasury…?)

It is more evidence that current editors & writers for this publication are as out of touch with reality as they are bereft of knowledge of basic microeconomics.

What is happening is that years of central bankers engaging in a form of central planning have fixed interest rates at almost zero. In turn, this has had the same distorting effects in financial markets as does price fixing in goods markets.

But much worse is that the mis-pricing of risk has undermined the real sector of the economy causing deindustrialization as funds are diverted into financial assets. Banks are de-incentivized to lend to manufacturing or industrial ventures since they can make mountains of money simply holding or trading sovereign debt that involves much less risk & is much less costly.

The “financialization” of the US economy explains in large part why unemployment rates in the US remain stubbornly high & GDP growth rates remain low. Yet all this is being done in the name of “stimulating” economic recovery or tampering with targeted sectors.

Does no one notice that forcing down mortgage rates is likely to pump air into yet another real estate bubble, just as the excess liquidity is inflating stock market indices.

In all events, this is an old story whereby negative “real” interest rates induce lending that is non-economic inasmuch as it will not & cannot be supported by existing production levels or productivity growth.

It is not merely economic ignorance that is at play. It is that too many “learned economists” are backing the wrong horse. Support for economic “stimulus” is based on a repackaged argument that involves using monetary policy to create-something-out-of-nothing.

History provides voluminous evidence that the advice of inflationists (remember John Law?) leads to extensive economic grief.

Beware! (But feel free to make hay while the sun shines since much money can be made playing the markets.)

Despite media bias in favor of gun controls, official US government data indicate that crimes committed with guns (including killings, assaults, robberies, etc.) have dropped sharply in the US after peaking in the mid-1990s.

A report from the US Bureau of Justice Statistics indicates that non-fatal gun crimes fell by 69% & the gun murder rate decreased 39% between 1993 & 2011. (While overall violence has dropped in the US, it does have a higher murder rate than most developed countries.)

Even so, a survey conducted by the Pew Research Center indicates that most Americans are unaware of the decline & more than 1/2 believe that gun crimes are have risen. The Pew survey indicates that only 12% of Americans surveyed thought that gun crime had declined over the past 2 decades while 26% thought it remained the same & 56% thought it had increased.

Just as a few hot summers helped shape (false?) expectations of rising average global temperatures (aka, global warming or climate change), it appears wall-to-wall media coverage of the horrors of a few mass murders support misleading impressions about violence in the USA.

A NYT article describes a reporter’s interpretation of the free-market oriented views of Glenn Hubbard with the proto-Keynesian views of Larry Summers.

As for the latter:
“…many of Summers’s papers explored the reasons markets aren’t always perfectly efficient.”

So, anyone that really believes there is academic merit in trying to prove ANYTHING is not “always perfectly efficient”; raise your hands!!! It is symptomatic of a so-called intellectual to be surprised when the real world does NOT comport with their models.

In all events, such a benchmark clearly tends to lead to criticizing markets for failing to do the impossible & also invites foolish suggestions about how politicians & bureaucrats can make them better!

Among Larry’s doltish remarks:

“But this needs to be done in a balanced way. The highest priority is getting the economy growing.” Summers said that he expected the government debt to grow, because the cost of services that the government pays for — like education and health care — are rising far faster than many of those bought in the private sector.

First, it is true that there are ways to get the economy to grow. The question is whether the policies that Summers prescribes actually help or hinder! Look to Japan for a hint. Despite nearly 2 decades of continual deficits, zero-interest rates & massive injections of liquidity, Japan’s economy remains moribund.

Instead of declaring defeat, the case of Japan has been a source of delusional denial of the failure of “stimulus” policies!

Second, it does not seem occur to him that costs of services (health & education) are rising BECAUSE governments provide them!?! And that cost-containment is something that most governments at all levels have a terrible track record.

If there is truth in the expression that “insanity involves doing the same thing over & over while expecting different results”, perhaps Keynesian practitioners might rightly be consigned to an asylum…?

During the first quarter of 2013, US GDP rose to $16 trillion after growing at an annual rate of 2.5%, up from 0.4% over the last quarter of 2012.

But consumer spending accounted for nearly 90% of the GDP growth over the first 3 months of 2013 with business spending on plant & machinery adding only 2.1%. Since business spending is a strong predictor of future hiring and wage increases, this is bad news for workers.

It turns out that consumption can never be the basis of sustainable economic growth since prosperity is based on the production of more goods rather than on consumption, per se. What is going on is that all this new consumption is enabled by monetary pumping from the FEDs “unconventional” monetary policies.

And monetary inflation has also provided excess liquidity that has been driven into assets that boost the net worth of the super-rich, thereby exacerbating inequalities in income and wealth. Those that anguish so much about disparities in income or wealth must understand that the blame falls squarely on central bankers rather than the market.

The US economy supposedly left its recessionary bottom in June 2009. Over the 15 quarters since, annualized GDP growth rate has averaged 2.1%, less than half the 4.4% average rate of the past nine recoveries.

With the current expansion generating subpar growth rates, unemployment remains high and real median household income is about $3,000 less than the end of the recession.

These dismal results are registered despite the best efforts of policy makers to “inflate” the US economy. Their response…?

More of the same!!!

And so, the federal government continues to run massive fiscal deficits that adds inexorably to public-sector debt. Of course, all this is facilitated & encouraged by the FED holding interest rates close to zero as well as acting as “buyer of first resort” of Treasuries.

Unfortunately, the basis of this ill-fated logic is the belief that consumption is the main driver of economic growth; this myth guides the manner in which GDP is measured & reported.